Must-know: Secondary market activity in leveraged loan funds

Market Realist

Must-know: Corporate bond trends in the week ending August 15 (Part 9 of 9)

(Continued from Part 8)

CLO deals

Three Collateralized Loan Obligations (or CLO) deals for $1.4 billion came through in the week ending August 15. This was down slightly from the previous week’s levels. There was $4.1 billion issued over seven transactions last week. It brings the year-to-date (or YTD) issuance and transaction figures to $80 billion and 147 deals, respectively.

The market for CLOs has touched new highs in 2013 and 2014. There were a record number of transactions and issuance volumes. Low yields on safer debt securities (AGG), like investment-grade debt (BND), have forced investors to “reach for yield” in high-yield debt (HYG) (JNK) and leveraged loans (BKLN).

CLOs have certain advantages for investors. CLOs can slice credit risk into tranches. An investor with a low risk appetite may get exposure to AAA-rated debt tranche in a CLO. An investor with a higher risk tolerance can earn higher yields by investing in lower-rated tranches.

Secondary market activity

Flows into mutual funds highlight key momentum shifts among investors. Although they tend to lag market movements, they provide clues about market sentiment.

Leveraged loan (BKLN) mutual fund net outflows came in at $687 million in the week ending August 15. This compares to net outflows of almost $1.5 billion in the previous week. Last week brings the total YTD net outflows to $2.2 billion. The low and declining yields environment was caused by the Fed’s continued dovish policy in 2014. This affected investor flows.

You can read about the Fed’s latest monetary policy update from its July Federal Open Market Committee (or FOMC) meeting and how it affects exchange-traded fund (or ETF) investments in the Market Realist series,   Fed’s July FOMC minutes have implications for stocks and bonds.

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